Question 1: A companys net income before taxes is $400. Included in net income is $20 of tax-exempt interest revenue from an investment in municipal bonds. The statutory tax rate is 25%. There are no other book-tax differences.

1. Calculate taxable income, income taxes payable, income tax expense, and the effective tax rate for the company.
2. For future review: Could you calculate net income before taxes if you were given taxable income and information about a permanent difference?

Question 2: On December 15, Year 1, a company received a check in the amount of $200 as payment in advance for rent of storage space for Years 2 and 3 ($100 per year). The statutory tax rate is 25% for all three years.

1. What is the amount of the temporary difference at the end of each Year (Years 1, 2, and 3)?
2. Does this difference result in a deferred tax asset or liability?
3. What is the balance in the deferred tax account at the end of each year?
4. How would your answer change if the statutory tax rate was 25% for years 1 and 2 and 20% for year 3?

Other topics to review: net operating losses, uncertain tax positions